Subcontracting cost flow
Activity-based subcontracting in Supply Chain Management accounts for cost contributions to production flows based on subcontracted production flow activities. The cost contribution of subcontracted activities is estimated at standard cost of the service by using the service quantity calculation for the quantity that is used for the BOM calculation. By default, this estimation is the inventory default order quantity of the item.
When you receive material back from the subcontractor, and after you have posted the receipt advisory advice or a vendor packing slip on a purchase order that was created for a subcontracted activity, the system accounts for the value of the receipt in the WIP accounts of the production flow. This approach debits the actual production flow work in process for the service that is provided by the subcontractor to the company.
Deviations of invoices to the receipts are also considered variances to the production flow. The cost category allows for transparent tracking of the value of subcontracted work that is allocated to WIP and consumed each period.
Backflush costing for lean manufacturing at the end of a costing period calculates the actual variances of the products to standard cost for products that are produced out of the production flow during the costing period.
Scenario
This scenario describes the subcontracting cost flow, where material is left over in the WIP accounts throughout the subcontracting process.
In this scenario, the product that is being manufactured out of the subcontracting process is L0101, a Speaker driver. The subcontractor performs the process. The finished Speaker driver has a standard cost of 0.90 US dollars (USD).
This standard cost is calculated as such:
Direct material = USD 0.10, calculated with one unit for each product of item L0101, Speaker driver with a cost of USD 0.10.
Indirect cost = USD 0.20, calculated with 200 percent of direct material cost.
Direct outsourcing = USD 0.60, calculated as one unit of service for the subcontracted activity for each product at a cost of USD 0.60.
Currently, four kanbans for 50 units each have been initiated, one kanban of 50 units has been produced, and three kanbans of 50 units of raw materials have been replenished into the production flow. One hundred (100) units of service for the subcontracting process have been received at USD 0.65 for each unit.
Fifty of these units were invoiced at USD 0.70 for each unit.
The following steps show what occurs within the subcontracting process and the subsequent results of those actions.
The subcontractor delivers 50 units at a standard cost of USD 0.90 for each unit, resulting in a WIP credit of USD 45.00 and a finished goods debit of USD 45.00.
The product receipt for 100 service units is received at USD 0.65 for each unit, resulting in a liability credit of USD 65.00 and a debit to WIP of USD 65.00.
The vendor invoice is received for 50 units at USD 0.70 for each unit, resulting in a variance of USD 0.05 for each unit. The liability account is credited for USD 2.50 and the WIP account is debited for USD 2.50.
At period-end, backflush costing is run, and in this scenario, the status of products is then considered.
45 units of unpainted cover remain unused in the production flow.
50 units of chrome cover are still in process in the production flow.
50 units of chrome cover have been received as output of the production flow.